Explaining Intra-Monthly Consumption Patterns: The Timing of Income or the Timing of Consumption Commitments?

Abstract

A number of recent studies have concluded that consumer spending patterns over the are closely linked to the timing of income receipt. This correlation is interpreted as evidence of hyperbolic discounting. I re-examine patterns of spending in the diary sample of the U.S. Consumer Expenditure Survey, incorporating information on the timing of the main consumption commitment for most households - their monthly rent or mortgage payment. Rent and mortgage payments are most often made at the of the month, so responses to the pattern of committed expenditure are easily confounded with the timing of first of the month income streams. In empirical models that control for both the timing of rent/mortgage payments and the timing of income, I find that consumption spending is strongly related to the timing of rent/mortgage payments, and only weakly related to the timing of income. Moreover, households with weekly, biweekly and monthly income streams but the same timing of rent/mortage payments have very similar consumption patterns. Focusing on Social Security recipients, I find that the sharp intra-monthly decline in spending documented by Stephens (2003) is only present for the 20% of recipients who make monthly rent or mortgage payments. These findings suggest that any policy prescriptions for altering the timing of income payments should also take account of the impact of consumption commitments on consumer spending and welfare.